Is the worst over?

While wholemilk powder prices are still sitting 9% below their five-year average, market sentiment is changing. The most recent Global Dairy Trade (GDT) auction recorded its fourth straight price rise last week.

Looking at sentiment, three things have helped turn the price tide, according to Penny.

Firstly, prices hit very low levels, and this has led to increased buying interest, notably from the Middle Eastern and European buyers.

After all, everyone loves a bargain, he says.

Secondly, the declaration of an El Niño weather pattern has increased the risk of a drought and a contraction of supply later in the season.

Lastly, oil prices have lifted over recent months, and this may have given further impetus to demand from Middle Eastern buyers.

However, NZ's biggest dairy market, China, remains a question mark. Chinese buyers haven't changed their buyer patterns materially, he says.

"Similarly, Chinese economic data is also inconclusive at this juncture," Penny adds.

On the supply side, the strength or otherwise of New Zealand spring production also has the potential to provide fresh direction to prices over coming months.

"At this juncture, and given that 2022 spring production was weak, we anticipate some lift in annual terms," he says. "However, that is likely to be tempered by the fact that cashflow pressures are likely to mean that farmers' purchase less feed and other inputs. Later in the season, El Niño could lead to drought and put downward pressure on New Zealand production."

Westpac has lifted its 2023-24 forecast milk price to $7.25/kgMS. ASB's new forecast milk price is $7.35/kgMS. Fonterra recently raised its forecast farmgate milk price range to $6.50 - $8/kgMS, with a new midpoint of $7.25/kgMS, up 50 cents.

ASB economist Nat Keall says with reasonable lifts for four consecutive auctions, August's lows are looking increasingly like a near-term floor.

All WMP contracts - stretching well into the season - have lifted, and the curve has been consistently flattish-to-slightly-upward tilting, Keall says.

"That's a sign that underlying demand is indeed firmer and it isn't only a near-term shortage or some other squeeze skewing the overall figure."

However, Keall cautions that there are downside risks to the outlook. The continued weakness of the Chinese economy is likely to continue crimping dairy consumption.

"Nonetheless, near-term risks to the dairy price outlook are clearly looking more balanced."

Two other factors may yet impact dairy prices in the coming months.

Keall says the developments n the Middle East may boost oil and grain prices if sustained, in turn triggering further tightening in global dairy supply. Meanwhile, with the NZ dollar hovering around US60c, Fonterra is all but assured of a favourable effective exchange rate - possibly around 61 or 62 US cents.